WASHINGTON - The U.S. consumer watchdog said on Wednesday it has sued ITT Educational Services Inc (ESI) for what the agency says are predatory student lending practices that could lead borrowers to default on their loans.
The U.S. Consumer Financial Protection Bureau said the Indiana-based for-profit college chain exploited students and pushed them into "high-cost private loans" that leave them strapped with debt.
The agency, in a complaint filed in U.S. District Court in Indianapolis, Indiana, said it is seeking restitution for victims, a civil fine, and an injunction against the company.
"Today's action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics," CFPB Director Richard Corday said.
The company is also facing legal action from different states, including New Mexico which is suing over the ITT's nursing program, saying that many students were unable to complete the program or transfer their credit to other institutions.
Shares of ITT slumped 8.6 percent on Wednesday to $32.56.
ITT has more than 140 institutions in nearly 40 states, and also operates as ITT Tech and Daniel Webster College.
"We believe that the bureau's claims are without merit and we intend to vigorously defend ourselves against those charges," Nicole Elam, a spokeswoman for ITT, told Reuters.
The CFPB said that ITT used high-pressure tactics to push students into taking out loans without enough time to understand the details, misled students about future job prospects, and coaxed students into taking out more loans, while knowing they would not be able to pay them back.
While most students in for-profit colleges take out federal student loans, the consumer watchdog said that many for-profit colleges pressure the students to take out additional private loans, which tend to have higher interest rates and tighter repayment terms.
Citing data from the National Center for Education Statistics, Cordray said that only 28 percent of bachelor's degree students starting a four-year program at for-profit colleges in 2004 graduated within six years, half the rate for students at four-year public institutions.
The CFPB has taken a wide interest in the private student loan industry and has sought to exercise more oversight over private lenders and for-profit institutions.
The agency has taken aim at private lenders such as Sallie Mae and Discover Financial Services for their student loan lending practices.
CFPB has oversight over the student loan servicing activities of large banks with more than $10 billion in assets. Under a new rule set to take effect on March 1, it expects to expand its supervision to non-bank student loan servicers that handle more than 1 million accounts, regardless of whether they include federal or private loans.
The lawsuit against ITT is the agency's first enforcement action against a for-profit college. (Additional reporting by Aruna Viswanatha; Editing by Franklin Paul, Leslie Adler and Bernard Orr)